One of the chief benefits of offering a personalized benefits solution like the qualified small employer health reimbursement arrangement (QSEHRA), or small business HRA, is its potential to save small businesses money.
Because the QSEHRA allows businesses to set their own budget on a per-employee basis, business owners can control costs—and, because individual insurance is almost always cheaper than group policies, small businesses often cover their employees’ entire premium while cutting expenses.
But not all individual markets are the same. While covering an employee under a group policy is more expensive for most small businesses, there are several parts of the country where the individual market has deteriorated to the point that an individual policy is actually more costly.
In these situations, does it still make sense to offer personalized benefits instead of a traditional group policy?
In this post, we’ll explore how to determine whether the group or individual market is more favorable, when to explore options outside of group, and how to determine if a QSEHRA is the best fit, even if it’s more expensive.
Determining whether the group or individual market is more favorable
Is the group market in your area more favorable than the individual market?
Relying on news reports that individual premiums are increasing or that industry experts are worried about a “death spiral” isn’t the most accurate way to tell. Although individual market rates have risen dramatically, group premiums have also climbed in recent years.
Businesses are now facing average annual group premiums of $6,435 for single coverage and $18,142 for family coverage – an increase for the latter of 58 percent since 2006. Monthly, businesses pay $536 for single coverage and $1,512 for family coverage.
As a result, it’s rare that you would need to compare the group and individual markets before choosing to offer a QSEHRA.
If you are concerned about the health of the individual market in your area, however, you may want to go through the exercise below. Start by soliciting quotes both for group policies and individual policies on your local public exchange. Then, compare the cost of covering a single employee under a group policy with the cost of the average individual premium to determine which option is most cost effective.
Similarly, if you multiply the average individual premium in your area by the number of employees in your company, you’ll have a good baseline for comparing the cost of a QSEHRA with a quote on group coverage.
When making these calculations, don’t forget to include the marital status (single or family) of your employees.
As an example, let’s look at a small business in Juneau, Alaska. Premiums in that area currently reach as high as $1,500 a month for an individual. For a business with 10 single employees, that’s $15,000 a month – far more than the $7,800 per month that business could expect to pay according to group averages in Alaska in 2016.
In this case, Juneau is an area where group insurance is less expensive for small businesses than sending employees to the individual market under a QSEHRA.
If this is also the case for you, you may be tempted to opt for traditional group insurance rather than the QSEHRA. That may be the right choice for your business.
However, there are several considerations you should make outside of cost when deciding between these two options. Group insurance has numerous structural problems that may mean it’s not the best fit for your company. Your personal preferences as a business owner and the preferences of your employees matter, too. You should also examine how the QSEHRA performs against group insurance for real businesses.
Let’s walk through four considerations related to health benefits, and how group insurance and the QSEHRA answers each.
1. Cost control
Small business owners, perhaps even more so than large business owners, rely on the predictability of a budget. Next to cutting back on expenses, business owners need to control their costs in order to feel confident moving forward with other financial decisions.
While traditional group policies may be less expensive, they expose small businesses to the imprecise whims of the market. At each renewal, they must choose to accept a rate change, shop for a new policy, or cancel coverage. There is usually little warning of whether rates will change, or by how much. All of this can make budgeting difficult.
Under a QSEHRA, however, business owners have complete control over their spending. They can spend as little or as much as they like – up to annual caps of $4,950 for single employees and $10,000 for employees with families.
At the beginning of the QSEHRA plan year, small business owners decide how much to spend per employee. When renewal time comes, they have the choice of continuing with that amount or adjusting it according to their needs. They can also make adjustments to allowance amounts midyear, provided they send a notice of the change.
This eliminates the element of surprise inherent in group policies, and allows small businesses to control costs while offering a formal benefit.
2. More value to the employee
More than 80 percent of businesses say their primary reason for offering benefits is to retain employees. It follows, then, that employees must perceive their benefits as valuable for businesses’ goals to be met.
Yet only 37 percent of employees have access to their company’s health benefits plan, and just 22 percent participate. Spouses and dependents may or may not be covered, and there’s no value to employees who already have access to benefits through their spouse or a health care sharing ministry. Overall, a meager 32 percent say their group health benefits are “definitely worth” the out-of-pocket costs.
By contrast, QSEHRAs grant access to all full-time employees, along with their spouses and dependents. Small businesses can also choose to extend the benefit to part-time workers. And while QSEHRAs don’t reimburse fees associated with a group plan or health care sharing ministry, employees who fall into those categories can still access funds for out-of-pocket or copay expenses. Even employees who don’t have health insurance can receive the funds for medical expenses.
Employees under a QSEHRA also have considerably more freedom in how they choose and access their benefits.
Unlike group policies, which cover the same services for all employees, QSEHRAs allow employees to make coverage choices based on their own needs.
Employees can choose a comprehensive Gold-level policy, or they can purchase a high-deductible health plan (HDHP) if they want access to a health savings account (HSA). They can use their allowance entirely toward health coverage, or they can reimburse themselves for other insurance policies, like dental or vision.
And because the QSEHRA reimburses employees for out-of-pocket medical expenses, they can use employer funds to pay for copays, deductibles, contact lenses, and other items.
With these additional expenses available for reimbursement, participants in personalized benefits solutions like the QSEHRA use an average 87 percent of their available monthly allowance.
This expanded eligibility for both employees and employees’ reimbursements provide additional value to small businesses and their workers – value they can’t get from a group health insurance plan.
3. Less complexity for you
Complexity and administrative time are among the most important factors in determining whether small businesses offer health benefits. For some businesses, the time cost associated with group health plans is simply too much.
More than 8 percent of an HR professional’s week is spent on administration, including health benefits administration, and the average small business spends 13 hours a month making sure they’re compliant with health insurance laws.
A QSEHRA is simple by comparison. Businesses offering a QSEHRA through a software platform spend an average 30 minutes setting up their plan and five minutes administering it every month.
A QSEHRA software solution also addresses complex concerns like creating plan documents, storing medical information, and sending out notice requirements to employees.
There’s a cost consideration, too. By offloading these and other HR responsibilities, small businesses can save more than $2,000 per employee per year.
4. What your employees want
Beyond cost and value considerations, small businesses need to consider what their employees want from their health benefits.
Again, most small businesses offer benefits in order to hire and keep employees, so it’s critical to offer something that employees want. Increasingly, that’s not group health insurance.
Eighty percent of employees say having choice in health benefits is either “extremely” or “very important,” yet small businesses offer an average of just two plan choices to each employee through group health insurance.
A QSEHRA, on the other hand, maximizes employee choice both through the number of policies available and the variety of expenses they can submit for reimbursement. Even in areas where the individual market provides little choice, employees have more freedom than they do with group policies because they’re choosing how to manage their own health care budget.
Deciding between group health insurance and the QSEHRA
Regardless of where your small business is located, your best scenario is one in which everyone receives value from your company’s benefits plan.
If you live in an area where group health insurance is more affordable than individual insurance, your best choice may be group coverage. If you can afford a policy, know that all of your employees will enroll, and feel confident that all of your employees would prefer it, you may not benefit from a QSEHRA.
However, if any of the above four considerations apply, it may be worth considering a QSEHRA.